A steady decline in the price of solar modules since October 2022 will boost the internal rate of return (IRR) of the utility-scale solar projects of 45 gigawatts (GW) capacity awarded since FY21, ratings agency Crisil said on Tuesday.

This, in turn, will propel solar capacity implementation to its fastest annual pace of 16 GW in the current financial year.

Implementation had slowed in FY22 and FY23 due to the Covid-19 pandemic-related disruptions and challenges stemming from efforts to protect the Great Indian Bustard bird, leading to grant of extensions by the relevant authorities. That, along with an upsurge in module prices, had delayed execution, Crisil said.

Now, with module prices cooling once again , the end of pandemic-related disruptions, and clarity over the protection process for the Great Indian Bustard (bird diverters to be installed on extant and new low-voltage transmission lines), execution is expected to be hastened by FY26, it added.

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“If implemented as per schedule, the average IRR of around 20 GW projects auctioned during FY21 and FY22 could have fallen to as low as 5 per cent, with some even becoming unviable on a standalone basis. However, the pandemic-linked extension in the scheduled commissioning dates provided relief to these projects, giving developers a chance to defer module purchases,” Crisil Ratings Director Ankit Hakhu said.

Now that module prices have softened by around 30 per cent as of September 2023, compared with the average last fiscal, project IRRs may improve by 300-500 basis points (bps) to around 9 per cent on average, he added.

Hike in raw material prices

The trend of falling module prices had reversed in the last quarter of fiscal 2021 as higher prices of key raw materials such as polysilicon and aluminium drove up the cost. This impacted the returns of around 20 GW of projects auctioned in FY21 and FY22 — included in the 45-GW solar project pipeline cited above — as developers had factored in the falling module prices when bidding for capacities. Module prices are typically finalised closer to the installation period of 6-9 months.

“Softer module prices will also benefit 25 GW of capacities bid during and since FY23. These 25 GW of projects had higher bid tariffs (Rs 2.5-2.7 per unit) compared with those awarded in prior fiscals (below Rs 2.5 per unit), as they factored in higher module costs, and should see their IRR improve 200-300 bps now that module prices have eased,” Crisil Ratings Associate Director Varun Marwaha said.

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The improving returns will support execution of nearly 16 GW solar capacities this fiscal and pave the way for the implementation of the remaining 29 GW (out of 45 GW) over FY25 and FY26.

Of the around 16 GW forecast to be implemented this fiscal, over 5 GW was commissioned till September (compared with around 12 GW for the whole of last fiscal). In line with previous years, the implementation is expected to pick up in the second half of the fiscal.

The projections remain sensitive to the impact of geopolitical issues on supply chains or levy of additional duties to safeguard the interests of domestic manufacturers, which could weaken the IRRs of solar projects.